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Fair Work Commission’s new approach to interpreting agreements makes good drafting more important

Until recently, the ‘first step’ when interpreting an enterprise agreement has been for the Fair Work Commission to make an objective judgment about whether the wording of a provision is susceptible to more than one meaning.[1]

The Commission has now adopted a new approach, which is to consider the surrounding circumstances at the time the agreement was made to determine whether it is ambiguous, and if so, to determine what was really meant by the parties.[2]

The Commission’s principles are as follows:

The Acts Interpretation Act 1901 will not apply to the interpretation of an agreement.

It will first be necessary to determine whether an agreement has a plain meaning or contains an ambiguity.

The Commission may now consider evidence of surrounding circumstances to help determine whether an ambiguity exists.

If the agreement has a plain meaning, evidence of the surrounding circumstances will not be allowed to contradict the plain language of the agreement.

If the language of the agreement is ambiguous or susceptible to more than one meaning, evidence of the surrounding circumstance will be allowed to help interpret the agreement.

The ‘surrounding circumstances’ will be the ‘objective framework of facts’, which will include:

evidence of prior negotiations as they may help establish objective background facts known to all parties and the subject matter of the agreement;

facts that are so well-known that knowledge of them is to be presumed;

evidence of matters that the parties mutually assumed would be the case.

The resolution of a disputed interpretation of an agreement will turn on its language, understood having regard to its context and purpose.

Context might appear from:

the text of the agreement viewed as a whole;

the disputed provision’s place and arrangement in the agreement;

the legislative context under which the agreement was made and in which it operates.

Regard will not be had to the subjective intentions or expectations of the parties. The parties’ common intention will be identified objectively, by reference to what a reasonable person would understand by the language of the agreement.

The task of interpreting an agreement does not involve rewriting the agreement to achieve what might be regarded as a fair or just outcome. The task is always one of interpreting the agreement produced by parties.[3]

Does the new approach put the cart before the horse?

The Commission’s new approach reflects one recently adopted by the Federal Court in relation to the interpretation of commercial contracts.[4] Arguably, it is at odds with the traditional approach of needing to find ambiguity first before looking at anything else.[5]

The new approach means that a simple reading of an agreement may not be enough. ‘Surrounding circumstances’ may be considered just to work out whether the agreement is ambiguous in the first place.

It might not be easy to know where that exercise begins or ends. The temptation will be to range very widely. Large amounts of material might be relied upon in trials, making them potentially longer and more expensive.

At the front end, drafting an enterprise agreement will be challenging. Parties will need to ensure that each word accurately reflects their mutual intention as to its meaning; a task that many a skilled legal draftsperson finds difficult at the best of times!

For better or for worse, it will be necessary to approach negotiations of an agreement like a commercial contract. Good records will need to be kept to prove, if needed, that bargaining representatives knew what the words were intended to mean. It might also be worthwhile thinking about using contract devices like recitals, to set out the ‘objective framework of facts’.

Unfortunately, the way that the courts and the Commission are going, the whole area of enterprise agreements is not getting any easier for employers.

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Compare jurisdictions: Employment & Labor: International

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